LOS ANGELES - California Treasurer Kathleen Brown yesterday said the state should create an economic recovery authority to oversee a borrowing that eliminates the state's accumulated deficit.

Under Brown's plan, the deficit borrowing would be repaid through a three-year extension of a temporary half-cent sales tax increase scheduled to expire on June 30. The statewide tax increase raises about $1.5 billion annually.

Brown estimates the state's accumulated deficit at almost $4 billion, a figure that includes a $973 million off-budget loan to schools.

A deficit borrowing "won't solve all our budget problems," Brown said in a release, but it would be a step toward "finally acknowledging the reality of our deficits, establishing a prudent mechanism for paying them off, and adopting safeguards" that cut down on short-term borrowings.

Brown suggested that the state's short-term borrowing, including any future deficit financing, should be capped t this fiscal year's level of $5.5 billion in notes. This would mean the state's regularly scheduled revenue anticipation note issue in August could not exceed $1.5 billion if a deficit borrowing totaled $4 billion, the treasurer said.

Brown's proposal was not a surprise - she foreshadowed many of the details at a May 12 hearing on the state's cash pinch.

Since then, however, Gov. Pete Wilson has unveiled is own deficit borrowing proposal that would repay $2.7 billion of the deficit over and 18-month period. Wilson, who has steadfastly opposed extending the temporary sales tax increase, on Thursday proposed securing the deficit borrowing with the state's existing sales tax revenue stream, minus the temporary hike.

Michael Reese, a spokesman or Brown, acknowledged yesterday that the treasurer and governor are at loggerheads over the sales tax extension.

He added, however, that "it's early in the budget dance here."

Democrats in the Legislature increasingly see the merit of extending the sales tax specifically to eliminate the deficit, rather than simply using the funds to pay for ongoing programs, Reese said. Brown's proposal represents "a good middle course" between Wilson's stance and the positions taken by some legislators, he added.

Any budget compromise must satisfy Democrats, who control the California Legislature,and Wilson, who is a Republican. Brown's recommendations provide added spice because she is considered a Democratic front-runner to oppose Wilson in next year's gubernatorial election.

Reese said the treasurer disagrees with the governor's deficit borrowing approach because it fails to incorporate the off-budget loan to schools that has helped balance the state's budget. The treasurer also believes Wilson's plan fails to provide a mechanism that addresses "downside risk" in fiscal 1994, which begins July 1, Reese said.

"These could include automatic cuts in programs pre-determined by the Legislature, automatic loop-hole closings, or emergency powers giving the governor authority to make expenditure cuts comparable to the size of the downside risk," the treasurer's press release says.

Brown's proposal would need legislation to establish such triggers and bill to extend the sales tax increase, which was put in place two years ago as a temporary budget-balancing measure. Accordingly, the governor would have to buy into Brown's plan for it to become law.

The borrowing under Brown's proposal would also require court test case to ensure its legality.

The financing structure would rely on an "obligation imposed by law" legal theory, which provides an exception to the need for voter approval on certain debt extending into future fiscal years. Los Angeles recently used this debt limit exception to issue bonds to fund a tax court judgment against the city.

California has about $500 million in judgments against it that could be bonded out,the treasurer said, and "at least $8 billion in other obligations, including those imposed on the state under federally mandated programs, that could fall within this legal concept."

Reese said a deficit borrowing through the proposed authority would be "completely separate" from a $2 billion revenue anticipation warrant sale scheduled for late June. The warrant sale is "going to go on regardless" of what happens with the deficit financing plan, Reese said.

Thomas Hayes,the state's finance director, wrote to Brown on Friday and cautioned that the budget deficit "not be characterized as a cash crisis since sufficient authority to meet the state's cash needs through the end of the [fiscal] year has already been addressed through the authorization" of the $2 billion warrant issue.

Drawing on testimony from market participants at he May 12 hearing, Brown said yesterday that "California could face the worst credit crunch of any government since New York City in the 1970s." She said the state is undermining the market's confidence by "building up more and more debt without a plan for paying it off."

Browns' plan would restore fiscal stability and possibility lessen draconian cuts for purposes such as local government and higher education, Reese said.